It’s tempting to doubt your investing strategy when the market changes course.
Maybe you’re worried that the recent uptick in the price of oil won’t hold. And maybe, like thousands of other investors, you’re tempted to sell your exchange-traded funds that invest in oil futures.
Here’s my advice: don’t.
The Wall Street Journal reported recently that oil and gas ETFs registered about $2.7 billion of investor outflows in April. Earlier in the year, when oil prices were lower, money was pouring into the funds.
What does that tell us about the future of oil prices? Absolutely nothing. With all due respect to the Journal, the outflow may show that money managers think oil prices will fall, but fortunes have been lost being wrong about where oil prices will go in the short term.
I’m not saying that oil won’t rise at some point, or for that matter, that it won’t fall in the coming months. What I’m saying is that you shouldn’t be buying ETFs based on short-term fluctuations in the underlying commodity. Just because ETFs can be traded as easily as stocks doesn’t mean that they should be.
It’s important to remember that ETFs offer investors a way to participate in long-term gains while reducing the short-term volatility that can come with owning a particular investment. In this case, it’s oil futures but the rules also apply to ETFs that own oil company equities.
If you trade around in ETFs based on your worries about short-term price fluctuations, you eliminate the whole reason for buying an ETF in the first place.
In fact, volatile price environments like we currently are experiencing in the oil market are exactly the reason you should be holding on to your ETFs. They were designed specifically to help investors weather fluctuations without exposing you to risk that futures traders have to deal with.
Regardless of where oil trades at today, it’s a pretty safe bet that it will rise over the next five to 10 years as global demand returns. The world’s population continues to grow, and more people means the need for more energy. At the same time, billions of people in emerging economies are fighting their way out of poverty, and they need energy to do it.
At some point, that energy may come from sources other than oil, but for the next few decades at least, oil and natural gas will remain the go-to energy commodities.
Let’s look at an example using an equity ETF that I own. Last summer the Energy Select Sector SPDR (ETF) (NYSEARCA:XLE) reached a high of $101.29. By mid-December, it dropped to almost $73. I bought it at about $75, and it has bounced around for most of this year. It’s currently trading at about $83, and if oil prices fall again and exerts more downward pressure on company earnings, it may fall again. But over the long term, it believe it will rise again.
When it comes to investing, it’s easy to get distracted by short-term movements. No one likes to see their investments suffer. But smart investors know that almost every investment does at some point. It’s important to review your strategy, make sure it’s in line with your investment goals, and stick with it. The payoff will be greater in the long run than if you try to anticipate the short-term ups and downs of a complex global market like oil.